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Licensing of Spectrum in the 850 MHz Band
to Enable the Provision of CDMA2000 Service
Statement of the Telecommunications Authority
27 April 2007
INTRODUCTION
On 29 November 2004, the Telecommunications Authority (“TA”)
issued a statement entitled “Licensing of Mobile Services on Expiry of
Existing Licences for Second Generation Mobile Services” announcing his
decision concerning the licensing arrangement of the second generation
(“2G”) mobile services upon expiry of the licences held by the incumbent
licensees. Among other things, the TA decided that the “right of first
refusal” would not be granted to the licensee providing mobile services
using the IS-95 CDMA standard (“CDMA service”), on the ground that it
did not make use of the assigned spectrum efficiently. Instead it was
offered to retain one-third of the originally assigned spectrum for the
purpose of subscriber migration over a period of 3 years.
2. The 3-year migration period granted to the licensee providing
CDMA service will expire on 20 November 2008. On 27 October 2006,
the TA issued a consultation paper entitled “Licensing of Spectrum in the
850 MHz Band to Enable the Provision of CDMA2000 Service” (“the
Consultation Paper”) to solicit views from the industry and other interested
parties on the need and the way forward to release spectrum to enable the
continuity of the CDMA services in Hong Kong after the expiry of the
migration period. At the closing of the consultation on 27 December 2006,
a total of 19 submissions were received. The list of respondents is given
in Annex I. All the submissions can be downloaded from website of the
Office of the Telecommunications Authority (“OFTA”) at
http://www.ofta.gov.hk.
3. Having duly considered all the views and comments received in
response to the Consultation Paper, the TA concludes the consultation
exercise by setting out in this Statement how he will deal with the relevant
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issues. In addressing the relevant issues in releasing spectrum for the
CDMA services, the TA will give due regard to relevant Government’s
spectrum management policy objectives / strategies as announced on 24
April 2007 (see paragraph 4 below). As required by the
Telecommunications Ordinance (“the Ordinance”), subsidiary legislation
has to be enacted for imposing spectrum utilisation fee (“SUF”) on the use
of spectrum and for prescribing the method of determining the SUF. The
Government will in due course table the relevant legislative proposal to the
Legislative Council for consideration.
PROMULGATION OF THE SPECTRUM POLICY FRAMEWORK
4. On 24 April 2007, the Commerce, Industry and Technology
Bureau (“CITB”) announced the Radio Spectrum Policy Framework (the
“Policy Framework”) that it had adopted upon completion of the review on
Government’s spectrum policy. The Policy Framework sets out the
following spectrum policy objectives:
(a) to facilitate the most economically and socially efficient use of
spectrum with a view to attaining maximum benefit for the
community;
(b) to achieve technically efficient use of spectrum to facilitate the
introduction of advanced and innovative communications
services and strengthen Hong Kong’s position as a
telecommunications and broadcasting hub;
(c) to fulfil Hong Kong’s regional and international obligations
relating to the use of spectrum;
(d) to strengthen Hong Kong’s strategic position as a world city and
the gateway between the Mainland of China and the world by
facilitating the provision of key services in Hong Kong which
are deployed, or will be deployed, globally or in the Mainland
of China; and
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(e) to ensure that necessary spectrum is reserved for services to be
provided by or on behalf of the Government (“Government
services”).
5. In the TA Statement issued on 24 April 2007, the TA has indicated
that he will, in addition to all relevant considerations as required by law,
give regard to the Policy Framework in exercising his statutory powers for
the management of the radio spectrum under the Ordinance. The TA
Statement of 24 April 2007 is applicable to the release of spectrum for
CDMA services.
LICENSING CONSIDERATIONS
Enabling the Provision of the CDMA2000 Service in Hong Kong
Proposal 1
The TA should make available to the market spectrum which enables the
provision of a CDMA2000 mobile service after 20 November 2008.
Views and Comments by the Respondents
6. In respect of Proposal 1 to issue a single new licence in the 850
MHz band to enable the continued provision of the CDMA services in
Hong Kong after 20 November 2008, there was general support from
CDMA2000 service providers and equipment suppliers overseas. These
overseas CDMA2000 service providers included those from Mainland
China, the US, Japan, South Korea, Indonesia, New Zealand and Thailand.
They unanimously agreed that, consistent with Hong Kong’s status as
Asia’s world city and the telecommunications hub in the Asia-Pacific
region, CDMA roaming services should continue to be provided in Hong
Kong. As an important destination for business and leisure travels, Hong
Kong should ensure that its telecommunications infrastructures and
services would be compatible with the rest of the world.
7. In its submission, China Unicom Limited (“Unicom”) pointed out
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that the existing CDMA roaming service provided in Hong Kong to its
subscribers was limited and suffered from problems like unsatisfactory
network coverage, high drop call rate and poor voice quality. According
to Unicom, Hong Kong was the destination of more than half of its CDMA
subscribers travelling abroad. There were already a rising number of
complaints from these subscribers when they roamed to Hong Kong. This
would inevitably tarnish the image of Hong Kong as a world city.
8. Unicom also advised that, following the issue of a CDMA2000 1x
EV-DO licence in Macau in October 2006, the technologically more
advanced CDMA2000 service was already available in the Greater China
region, with the exception of Hong Kong. If CDMA2000 service was
also available in Hong Kong, CDMA2000 service would be available
throughout the whole Greater China region, thus facilitating the
development of the service and the related industrial sector with synergy
effects.
9. Among the local operators, China Mobile Peoples Telephone
Company Limited (“Peoples”) and Wharf T&T Limited (“Wharf T&T”)
were supportive of the proposal to license the available spectrum in the 850
MHz band for the provision of CDMA2000 service. SmarTone Mobile
Communications Limited (“SmarTone”) was neutral as to whether the
spectrum vacated from the existing IS-95 CDMA service should be made
available for a new licence, but it would like the Government to make sure
that a clear and certain long term spectrum policy should be in place so that
potential investors could make informed decisions on spectrum bidding.
10. The other three mobile network operators, namely Hong Kong
CSL Limited / New World PCS Limited (“CSL”), Hutchison Telephone
Company Limited (“Hutchison”) and Mandarin Communications Limited /
SUNDAY 3G (Hong Kong) Limited (“SUNDAY”), disagreed with the
proposal and objected to the release of the vacated spectrum for a new
licence prior to the completion of the consultations on Spectrum Policy
Review (“SPR”) and Fixed-Mobile Convergence (“FMC”). They were of
the opinion that the “Policy First” principle should be observed such that
the licensing of the spectrum, as well as the related issues on the amount of
SUF and the licence conditions, should be determined holistically within
the context of the SPR.
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11. CSL, Hutchison and SUNDAY argued that the Hong Kong mobile
market was already facing over-competition and it would be severely
affected by the introduction of an additional licence. Furthermore, there
was no evidence that the market would require a specific CDMA2000
licence. They were of the view that the proposal to make available
spectrum for the CDMA service was in fact not a market-driven approach.
Hutchison further considered that it was only necessary for the TA to
license a CDMA network dedicated for carriage of roaming traffic only
catering for inbound visitors. In particular, Hutchison suggested that one
possible solution was to permit the operation of its existing IS-95 CDMA
service beyond the expiry date to provide the required roaming service.
12. Hutchison opined that the CDMA2000 service would bring
complications to the consumers given that the service interoperability
between WCDMA and CDMA2000 was uncertain. Content providers
would need to make provisions for two types of technologies, leading to
market fragmentation. Consumers would also be confused or dissatisfied
with the services.
13. From the technology point of view, some respondents considered
that specifying the deployment of CDMA2000 technology explicitly in the
proposed spectrum band was not “technology-neutral”. In particular, if
the Government’s policy was to uphold “technology-neutrality”, the TA
should not specify the use of CDMA2000 standard. If it was Government
policy to move away from “technology neutrality”, some respondents
considered that this should be clearly and publicly stated by the
Government to reduce investment uncertainties.
TA’s Consideration
14. The TA notes the general support given by the international
community to the proposal to make available spectrum in the 850 MHz
band to enable the provision of a CDMA2000 service. Having regard to
the Government policy objective (under the Policy Framework) of
strengthening Hong Kong’s strategic position as a world city and the
gateway between the Mainland of China and the world, the TA considers it
necessary to make spectrum available at the right time to ensure the
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continued availability of the CDMA2000 service in Hong Kong. The
strategic reasons mentioned in the Consultation Paper that the Government
needs to make available spectrum to enable the continuity of the CDMA
service remains valid. Firstly, as a world city, Hong Kong should provide
visitors from all over the world with first-class mobile services. Secondly,
to strengthen Hong Kong’s strategic position as the gateway between the
Mainland of China and the world, roaming service in Hong Kong should
continue to be made available to visitors using CDMA handsets. Thirdly,
the availability of mobile platforms using all the major cellular standards of
the world, including the CDMA2000 standard, will enable the industry to
acquire experience in operating the services and in the development of new
applications and content for all these platforms. All these points are in
line with the Government’s spectrum management policy objectives set out
in the Policy Framework.
15. The TA agrees that the policy of “technology neutrality” should be
adhered to unless overridden by Government policy or other public interest
considerations. Having regard to Government policy given in paragraph 4
above, the TA considers that he may need to deviate from the
“technology-neutrality” principle to provide spectrum to the market on this
particular occasion. However, the current deliberations on the need to
ensure the continuity of the CDMA2000 service in Hong Kong should not
in any way be deemed as setting a precedent for the spectrum release
considerations in future.
16. Regarding the comments that the Government should complete the
SPR and FMC review exercises first before release of spectrum, as the
Government has already published the Policy Framework on 24 April 2007,
the argument relating to the “Policy First” principle on spectrum
management has been satisfactorily dealt with. The TA has also
announced today his conclusions on the consultation exercise on the
deregulation for FMC. All these should serve to provide regulatory
certainty and predictability in the market in relation to the release of
spectrum. Incumbent and potential new operators should now have a
clearer picture of their future business environment, including the likely
constraints and competition they would have to resolve and encounter.
17. As pointed out in the Consultation Paper, the SPR will involve
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multiple implementation phases. Issues such as secondary trading of
spectrum and spectrum liberalisation require further debates and
deliberation. It will take time before these issues can be resolved
satisfactorily. In view of the ongoing developments of the
telecommunications industry and the need for a new CDMA2000 service
by November 2008, it is unreasonable and undesirable to withhold or delay
the release of spectrum altogether until the resolution of all related issues,
as this would hamper the introduction of advanced and innovative
telecommunications services in Hong Kong. To cater for rapid
technological and market developments, it is inevitable that regulatory
policies, including spectrum management policies, should evolve over the
licence term of the existing spectrum assignments. Having said that, the
TA will ensure that, in offering the spectrum in the 850 MHz band for
bidding, a comprehensive bidding document will be available setting out
the relevant terms and conditions for the use of the spectrum which a
potential bidder would reasonably expect to be informed of before it makes
the bidding decisions.
18. Concerning the allegations of “over-competition” in the mobile
market, the TA is of the view that when the vacated spectrum is made
available for auction, it is open to the interested parties to make the
commercial decision as to whether or not to bid for the spectrum. In
making such a decision, the market situation including the level of
competition will be an important factor for the interested investors to take
into account. If no bid is received during the spectrum auction, the TA
will withdraw the spectrum. Consistent with the market-based approach
endorsed as the guiding principle under the Policy Framework, the TA’s
role in this exercise is to make available the spectrum to the industry and
investors will determine whether to bid for the spectrum or not based on
their business plan and the market status. If the so-called
“over-competition” exists, it will be reflected in the auction exercise, i.e. no
bidder will offer to bid for the spectrum and to provide the service.
19. The TA also disagrees with the claim that the CDMA2000 service
would bring complications to the consumers given the potential
interoperability problems between WCDMA and CDMA2000. Hong
Kong has the tradition of operating multiple standards in the mobile service
market (e.g. the CDMA and GSM services operating in parallel since 1995)
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and no significant consumer confusion has arisen as a result of the
co-existence of multiple standards. As for consumers, the service
capabilities, user interface and the ease of service operations, rather than
the underlying technology deployed, should be the primary concerns for
service subscription choices. Through marketing campaigns and
consumer education that may be provided by the new licensee, consumers
in Hong Kong can readily understand the difference between the services
provided by the incumbent operators and the new licensee. Similarly,
content providers would have choices whether to develop their value-added
applications for different technology platforms. For good reasons, the
content providers will have the incentives, and probably with the assistance
of the network operators, to develop cross-platform contents.
20. As regards the proposal of permitting the operation of the existing
IS-95 CDMA service beyond the expiry date to provide the required
roaming service, the TA considers that, in order that Hong Kong may have
the best telecommunications services to meet the challenges of the
information age, the state-of-the-art CDMA technology and standard
capable of providing high speed data service with data rates comparable to
those using 3G technologies should be adopted. The deployment of
obsolescent technologies, such as the old CDMA standard of the existing
CDMA network in Hong Kong, is undesirable for the wider benefits of
Hong Kong.
21. Turning to the proposal of licensing the spectrum for roaming
services only, the TA considers that this restriction is likely to result in
suppressed spectrum value in the bidding process, commercial disincentive
for the successful bidder to invest in an efficient, state-of-the-art network
infrastructure that can fully exploit the potential of the spectrum and
therefore ultimately inefficient use of the spectrum. This is inconsistent
with the statutory duty of the TA under section 32G of the Ordinance to
promote the efficient allocation and use of the radio spectrum as a public
resource of Hong Kong and policy objective (a) of the Policy Framework.
22. The TA concludes that he should make available spectrum to
the market which enables the provision of a CDMA2000 mobile service
after 20 November 2008.
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Proposal 2
Auction should be used to determine to whom the spectrum released should
be assigned.
23. The TA notes that the respondents did not have opposing views on
the proposal to conduct an auction to determine to whom the concerned
spectrum should be assigned. The TA maintains that spectrum, being a
scarce public resource, should be utilised in the most efficient manner. It
is generally the consensus of the industry that assignment by auction is an
appropriate and market-driven means to decide who would be assigned
with the spectrum. Therefore the TA concludes that auction should be
used to determine to whom the spectrum released should be assigned.
SPECTRUM PLAN IN THE 850 MHz BAND
Proposal 3
The proposed band plan in the 850 MHz band as depicted in the following
figure should be adopted.
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Other Services
Other Services
823.7
824
825
Guard Band
Guard Band
Existing
GSM (Rx)
868.7
869
870
835
840
880
GSM (Rx)
Existing
GSM (Tx)
915
885
930
EGSM (Tx)
GSM (Rx)
890
GSM (Tx)
935
EGSM (Rx)
Reserved
Reserved
Block A (Rx)
Block A (Tx)
Other
Services
851
868.7
Other
Services
917
919
919.5
925
Other Services
* “Other Services” include Trunked Mobile Radio Systems, Mobile Data Systems, Cordless
Telephones and Radio Frequency Identification (RFID) systems.
While the frequency block from 825 to 835 MHz paired with 870 to 880
MHz may be made available to enable the provision of a CDMA2000
mobile service, views on the optimal amount of frequency spectrum are
welcome.
Views and Comments by the Respondents
24. The TA notes that Peoples, Wharf T&T and other overseas
equipment provider and service providers were in support of the
assignment of the proposed band plan for the provision of the CDMA2000
service. As a matter of fact, the proposed band plan was in popular use
around the world for the provision of CDMA2000 service. The existing
wide availability of CDMA2000 network infrastructure and commercial
equipment in the market could also readily support the provision of
CDMA2000 service in Hong Kong.
25. Meanwhile, Hutchison advised that the 800 – 900 MHz block
could also be used as the expansion band for WCDMA systems and hence
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the amount of bandwidth for CDMA2000 should be carefully considered.
Hutchison was of the view that a bandwidth of 5 MHz x 2 should be
optimal for a CDMA2000 network providing roaming services only.
26. Apart from the comments from Hutchison, the TA notes that there
were no other opinions on the optimal amount of frequency spectrum for
the new licence, other than the total bandwidth of 10 MHz x 2 as suggested
in the Consultation Paper.
TA’s Consideration
27. Given the strategic reasons for ensuring the continuity of CDMA
service in Hong Kong as mentioned in paragraph 14 above, the TA
proposes to release sufficient spectrum for auction for the provision of
CDMA2000 service only at this juncture. To avoid complicating the
entire exercise, other uses of the vacated spectrum would not be considered
at the moment.
28. The TA takes note of the comment of Hutchison on the amount of
spectrum that should be assigned. For the reasons given in paragraph 21
above, he does not intend to restrict the new CDMA2000 licensee to
provide roaming services only as this would result in under-utilisation or
inefficient use of the spectrum assigned. Considering that the existing
licensee providing CDMA services was all along assigned with spectrum of
a bandwidth of 7.5 MHz x 2 only, an amount of spectrum of 10 MHz x 2
may be more than sufficient. With a width of spectrum of 7.5 MHz x 2,
the new CDMA2000 licensee will have six (6) carriers at its disposal and
this should be adequate for it to provide a full range of services in the
territory. In future, if the CDMA2000 licensee requires additional
spectrum, it may make a request to the TA who will then consider to place
the requested spectrum on the next issue of the spectrum release plan.
With this in mind, the TA intends to make available the spectrum of 7.5
MHz x 2 at this juncture to enable the provision of the CDMA2000
service.
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PAYMENT OF SPECTRUM UTILISATION FEE (SUF)
Proposal 4
The use of spectrum by the licensee should be subject to the payment of a
one-off SUF the amount of which will be determined through open auction.
Views and Comments by the Respondents
29. On the payment of SUF, while the majority of the respondents did
not object to Proposal 4, there were divided views on the anticipated
amount of SUF, and hence the auction reserve price, for the use of the
available spectrum in the 850 MHz band by the proposed new licensee.
30. CSL considered that the amount of the reserve price in the
proposed open auction should be set at exactly the same level as the
amount of SUF paid by the existing 3G licensees during the auction of the
3G spectrum in 2001. CSL drew reference to recent spectrum auctions
conducted in the US, which showed that a similar block of spectrum still
cost a substantial amount of money comparable to the level paid in 2001
during the so-called “IT Bubble”. SmarTone shared similar views in that
the SUF issue should be considered in light of its impacts on competition
and the consumers as a whole. It argued that there might be distortions to
the market and to the regulatory framework if different levels or structures
of SUF were used.
31. Hutchison was of the opinion that the issue of SUF should be
resolved holistically within the context of the SPR as the amount of the
reserve price could not be determined appropriately and the bidders could
not properly assess their business case in the absence of a clear
understanding of the long term spectrum policy. SUNDAY considered
that restricting the available spectrum for the provision of CDMA service
would only reduce the value of the spectrum and even an open auction
would not reflect its true value. This would upset the current level
playing field.
32. Meanwhile, CSL opined that the appointment of consultants for
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the determination of the reserve price could be construed as a
“pre-determination”, i.e. the TA disregarding the views of the respondents,
as the TA did not advise that such a consultant would be appointed in the
Consultation Paper and nor had the TA indicated the weight that would be
given to the opinion of the consultant in comparison to the opinions of the
respondents.
33. On the contrary, Unicom and Wharf T&T considered that the
auction reserve price should be considerably lower than that of the 2G and
3G licensees, based on the facts that the market situation had become less
bullish compared to 2001 when the 3G auction was conducted, the
proposed new licensee would be having a slower start compared with the
other 3G licensees, and lastly the global market size for the CDMA2000
standard was comparatively smaller than that of the WCDMA standard,
which was being adopted by the four incumbent 3G licensees in Hong
Kong.
TA’s Consideration
Level and Structure of SUF
34. The amount of SUF payable by the proposed new licensee will be
an important consideration for potential investors who will need to develop
the business case to ensure the viability of the new licence, and also for the
incumbent market players who look for the maintenance of a level playing
field. Mindful that the amount of SUF should be determined through a
market-driven and competitive process, the TA has therefore recommended
the conduct of an open auction to determine the amount of SUF and to
whom the new licence will be granted. Logically, the level and structure
of the SUF, and the mode of payment, for a particular auction exercise have
to reflect the market situation and investment climate prevailing at the time
of the auction. As such, new spectrum auction exercises should not adopt
the same parameters that were determined in previous auction exercises but
should rather be subject to fresh assessments. If the reserve price and
structure of SUF being set to reflect the prevailing environment are
considered to be favourable by the market, any perceived advantage should
then be automatically reflected in the auction process when bidders will be
more aggressive to place bids and the bid price should adequately reflect
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the prevailing market value of the spectrum. The auction process is by
itself the ultimate safeguard to ensure that the amount of SUF is
appropriate and commensurate with market valuation.
35. As mentioned in the Consultation Paper, the one-off SUF lump
sum payment is a popular and simple payment scheme such that the bidders
simply place bids through auction on the amount of one-off payment they
are willing to pay for the use of spectrum. This arrangement is simpler,
quicker and easier to administer than the royalty payment scheme adopted
for the 3G licensees. During the design of the 3G auction in 2001, the
royalty payment approach was adopted to address the concerns that an
excessively high SUF lump sum payment would divert resources needed by
the successful bidders to roll out the 3G infrastructure and enabled some
sharing of risks between the Government and the bidders in view of the
uncertainties about 3G services. These concerns were connected with the
then prevailing sentiment about the prospects of 3G services. Such
concerns are no longer applicable at this point in time. Most importantly,
the amount of SUF determined by the one-off SUF lump sum will also
equally reflect the market value of the spectrum and safeguard the
Government’s revenue in SUF. Based on these considerations, the TA
will recommend to the Secretary for Commerce, Industry and
Technology that, in the making of the regulation under section 32I(2)
of the Ordinance, the level, or the method for determining the level, of
SUF will be based on a scheme whereby the SUF is paid as a one-off
lump sum.
Setting of Auction Reserve Price
36. In the proposed spectrum auction, the Government will need to
prescribe the auction reserve price. The auction reserve price should
represent the minimum acceptable value for the Government to assign the
right to use the spectrum for providing the CDMA2000 services. The
appropriate level of the auction reserve price should therefore be
considered meticulously. As required by law, subsidiary legislations need
to be introduced for imposing SUF on the spectrum concerned and for
prescribing the level of SUF or the method for determining SUF, which
may include the minimum fee.
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37. In this regard, OFTA has commissioned an independent consultant
to provide advice and recommendations on, inter alia, the calculation
methodologies and mathematical models for determining the amount of the
auction reserve price. The consultant was tasked to study and advise, not
only on the calculation methodologies and mathematical models for the
850 MHz band for the provision of CDMA2000 services on the assumption
that it will be released for auction by end 2007, but also on the applicability
of such calculation methodologies and mathematical models to spectrum
auctions for other types of radiocommunications services. At the time
when the consultancy study was commissioned, there was no
pre-determination by the TA that the spectrum should be released for
provision of CDMA2000 services at the minimum fee recommended by the
consultant. Whilst the TA has, in considering the issues raised in the
consultation, taken due consideration of all the responses from the industry
and the public, the outcome of the consultancy study, i.e. the recommended
calculation methodologies and mathematical models, will be used as
reference for the Government in preparing for the legislative proposal to
Legislative Council for consideration and in specifying the minimum free
in due course. In fact, the TA welcomes industry participation whenever
practicable. In response to CSL’s request for interviewing with the
appointed consultant, the TA had invited CSL to provide the information
which it considers useful for the consultant, so that the information may be
forwarded for consideration or reference by the consultant, though the TA
did not receive from CSL any information for the consultant.
38. As the way forward, the Government will table the legislative
proposal for imposition of SUF and determination of SUF by auction for
consideration and vetting by the Legislative Council. The proposed
legislation will empower the Secretary for Commerce, Industry and
Technology to specify the minimum fee by notice in the Gazette which will
be published nearer the time when the auction is conducted.
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SPECTRUM AUCTION FOR AWARDING THE NEW LICENCE
Auction Format
Proposal 5
It is proposed that a simple multi-round ascending auction (MRAA) should
be adopted in the licensing of the relevant frequency block. Bidders
should place open bids in multiples of the bid price increment, starting
from the reserve price.
Both the reserve price and the bid price increment will be announced by the
Government nearer the time of the auction.
The details of the auction process will be published in due course.
Views and Comments by the Respondents
39. CSL was of the view that the proposed auction should be identical
to the one conducted in 2001 for the 3G auction. The proposed auction in
the current form was flawed in the sense that the second highest bidder
should not be awarded the licence in the event that the highest bidder failed
to take up the licence. In that case, CSL considered that the auction
process should be re-started. SmarTone would like the TA to further
clarify whether there were any measures to prevent collusive behaviour and
manipulation of auction result in the proposed open bidding. The TA
should conduct a fresh auction if the winning bid defaulted.
40. Wharf T&T also advised that the present proposed
pre-qualification requirements were inadequate. Bidders should submit
network and service rollout plans with clear targets and timeframe. Only
those with the most aggressive and realistic rollout plans should be
admitted.
TA’s Consideration
41. As there is only one single block of frequencies available for
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licensing and as it is expected that there are competing demands in the
market, the TA believes that a simple open auction remains to be the most
cost-effective means for the award of the new licence. As emphasized in
paragraph 34 above, new spectrum auction exercises should not necessarily
follow the same parameters that were determined in previous auction
exercises, but should be subject to the prevailing market condition. There
is no point to slavishly follow the same auction format as in the 3G auction
conducted back in 2001.
42. The TA disagrees with Wharf T&T and maintains that there should
only be minimal pre-qualification requirements solely for registering of
bidders’ interest and for demonstration of the financial capability of the
bidders. The TA is mindful of keeping the pre-qualification requirements
simple in order to foster active participation from the industry and investors.
This is also in line with the practice adopted in the previous 3G auction
exercise.
43. However, the TA agrees that some of the issues raised by the
respondents have merits and deserve further considerations. For example,
OFTA will reconsider the proposal to award the new licence to the second
highest bidder whenever the highest bidder defaulted. The Government
will also take into account the potential problems due to collusive
behaviour and manipulation of auction result when it devises detailed
auction rules. OFTA will commission an independent consultant to
provide advice and recommendations on the auction design, including the
auction format and measures to prevent abusive conducts, collusive
behaviours and manipulation of the auction. In formulating its advice and
recommendations, the appointed consultant will carefully consider the
views and concerns expressed by the respondents and take them into
account when devising the auction rules. Before finalizing the auction
rules and related arrangements, the TA will carefully study the
recommendations to ensure that all the concerns expressed by the
respondents have been addressed and the spectrum auction will be
conducted fairly and properly. The auction details will be published
nearer the time when the auction is conducted.
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Eligibility of Incumbent Carriers or their Related Companies
Proposal 6
Incumbent 2G and 3G licensees should be permitted to take part in the
open auction for spectrum in the relevant frequency block provided that
they meet the pre-qualification requirements. In this exercise, there will
not be any bidding restriction in the form of a spectrum cap i.e. an upper
limit on the total amount of spectrum which will disqualify an incumbent
2G/3G licensee from bidding the spectrum.
An individual company or group of companies may not enter more than
one bid.
Existing licensees may form joint venture to bid for the licence and prior
consent from the TA is not required for participation in the auction.
Views and Comments by the Respondents
44. While the incumbent operators were generally in support of
Proposal 6, Wharf T&T disagrees that the incumbent operators were
permitted to bid for the spectrum on fairness grounds. New entrant to the
market should be encouraged, but the incumbent operators would likely bid
for the purpose of preventing entry of new operators. Effectiveness of the
proposed measures to prevent spectrum hoarding was thus doubtful.
Wharf T&T also disagreed that there was no spectrum cap applicable to the
incumbent operators.
TA’s Consideration
45. Having considered Wharf T&T’s view on Proposal 6, the TA
remains convinced that the incumbent 2G and 3G licensees or their related
companies should be permitted to bid for the spectrum in the relevant
frequency block provided that they meet the pre-qualification requirements.
Following the market driven approach, the Government should refrain from
imposing restrictions as far as practicable so long as there is no market
failure or when competition will not be significantly lessened. There are
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currently five mobile operators in Hong Kong and the mobile service
market is very competitive. It is not likely that an incumbent operator will
be in a more advantageous position as compared with other operators or
competition will be significantly lessened simply because additional
spectrum has been acquired by it in this exercise. Without any restriction
on incumbent operators to participate in the bidding process, there would
be more potential bidders, thus ensuring that the auction result will reflect
the true market value of the available frequency block. Furthermore, the
technical expertise of the 2G and 3G licensees will also enable faster
rollout of service. In addition, the licence obligation on network and
service coverage requirements together with the placement of a
performance bond to be mentioned in the subsequent paragraphs should be
adequate measures to prevent any spectrum hoarding by the new licensee.
46. Based on the above, the TA does not find it necessary to impose a
bidding restriction in the form of a spectrum cap i.e. an upper limit on the
total amount of spectrum that can be held by a licensee and its related
companies which would disqualify the incumbent operator from bidding
for the spectrum. Given the extremely competitive nature of the local
mobile market, it is not likely that one operator will be in a more
advantageous position as compared with others, or competition will be
significantly lessened, because additional spectrum has been acquired by a
particular incumbent operator in this exercise.
47. As mentioned in the Consultation Paper, the applicants will need
to satisfy a set of conditions governing “related parties1”, so as to qualify
for participation in the proposed auctioning exercise. Apart from the
specific rules suggested in the Consultation Paper, the TA will re-visit the
rules governing “related parties” and the consultant as mentioned in
paragraph 43 above will be asked to devise the appropriate rules to address
this subject matter.
1 Related parties means parties with a close relationship by means of a participation, indirect interest, or
control.
20
APPLICABLE REGULATORY FRAMEWORK AND LICENCE
CONDITIONS
Open Network Access (“ONA”) Requirement
Proposal 7
The new licensee using spectrum in the relevant frequency block should
not be subject to the ONA requirement.
Also, the ONA requirement as applicable to the existing 2G and 3G
licensees should be withdrawn altogether.
Views and Comments by the Respondents
48. CSL, SmarTone and SUNDAY showed their support to the TA’s
proposal not to impose the ONA requirements on the proposed new
licensee and also to withdraw the ONA requirements as applicable to the
existing 2G and 3G licensees altogether. However, Peoples and the
Society of External Telecommunications Service Providers (“ETS Society”)
queried the justification for the withdrawal of the ONA requirements.
They considered that there was no concrete evidence supporting the
proposal and the fact that there was not yet any request from the industry
for regulatory intervention did not necessarily imply the ONA requirements
could be withdrawn. The proposal was also unfair to the Mobile Virtual
Network Operators (“MVNO”) and the content providers. At present, the
ONA requirement did provide a scale of regulatory protection available to
the MVNOs and content providers against discrimination in the market.
Withdrawal of the ONA requirement would remove this regulatory
protection and it might be possible that the MVNOs and the content
providers would be subject to unfair and discriminatory treatment by the
mobile network operators. Wharf T&T also opined that a separate
consultation on the subject should be required.
TA’s Consideration
49. The TA notes the views expressed by Peoples and the ETS Society.
21
In the existing four 3G licences issued in 2001, the ONA requirements have
been incorporated as a licence obligation. This obligation should have
been taken into account by the 3G licensees when they bid for the spectrum
in 2001. The same ONA requirements have also been extended to all the
2G licensees who are required to comply with the requirements five years
after the commencement of their new licences issued in 2005 and 2006.
This obligation has also been made known to the industry including
potential MVNOs and content providers. While the TA considers that the
ONA requirements should be removed due to sufficient competition in the
market, the TA accepts that more time should be allowed for the industry to
consider the relevant issues in detail before drawing any conclusion as to
whether or not the ONA requirements under all the existing 2G and 3G
licences should be withdrawn. Therefore the TA decides that the ONA
requirements for all the existing 2G and 3G licences should be retained
for the time being.
50. As regards the application of the ONA requirements in the
proposed CDMA2000 licence, the TA considers that the
telecommunications market in Hong Kong has developed to such a stage
that ex ante regulation (i.e. regulation before the event) should be
withdrawn unless market failure exists or is expected to exist after
withdrawal of the regulation. For those reasons given in paragraphs 59
and 60 of the Consultation Paper, the rationale for using regulation to
mandate ONA has become increasingly questionable. While the ONA
obligations under existing licences should be dealt with through a due
process, the TA would not slavishly extend such obligations to new licences.
The TA therefore decides not to impose the ONA obligation in the
CDMA2000 licence. If there is market failure because of the absence of
the ONA obligation in the CDMA2000 licence, the TA can still have resort
to the powers under the Telecommunications Ordinance, such as section
36A, which empowers the TA to determine the terms and conditions of
interconnection between the CDMA2000 network and MVNO after taking
into account the factors concerning government policy, consumer interest,
investment, competition, etc. under section 36A(10). The absence of the
ONA obligation as an ex ante regulation will be reflected in the possibly
higher bidding price for the spectrum – therefore a level playing field will
be maintained between the operators with and without the ONA
requirements as an ex ante obligation.
22
Other Licence Obligations
Proposal 8
The new licensee should be subject to the following special licence
conditions:-
� Network and Service Coverage Obligation
� Performance Bond
� Denial of Service to Suspected Stolen Handsets
The new licensee will NOT be subject to the Domestic Roaming
Requirement.
Views and Comments by the Respondents
51. There are general support to the proposed licence obligations from
SmarTone, Peoples and SUNDAY. However, the TA notes that other
respondents have different views on some of the proposed licence
obligations. First of all, CSL considered that the proposed licence
conditions must be aligned with those imposed on the existing 3G licensees.
Hutchison maintained that the licence conditions applicable to the new
licensees should be resolved holistically within the context of the SPR.
52. Wharf T&T disagreed with the imposition of the network and
service coverage obligation and the performance bond requirement.
Wharf T&T believed that the new licensee would have every incentive to
roll out its network given that it had paid for the spectrum. Further, CSL
also questioned how to impose coverage at strategic locations given that the
TA did not have statutory power over those parties managing those
strategic locations.
53. On the denial of service to suspected stolen handsets, Qualcomm
Inc. (“Qualcomm”) advised that for non-removable user interface module
(“non-RUIM”) CDMA2000 handsets or devices, it was possible for the
CDMA2000 network to identify the individual CDMA2000 handset and to
23
deny service as required. For RUIM-based CDMA2000 handsets or
devices, the implementation would rely on the use of the Mobile
Equipment ID (“MEID”) which was already defined in the latest
CDMA2000 technical specifications. Theoretically, operators who had
implemented the Equipment Identity Register (“EIR”) could then make use
of this MEID to identify individual handsets and to implement the required
denial of service to suspected stolen handsets. However, this was an
optional feature only. As such, both network infrastructure and handset
vendor support were needed to ensure that this feature was implemented on
a global basis in all CDMA2000 handsets. It was not yet clear whether
this capability could be guaranteed for all handsets in use from November
2008 and onwards. It might therefore be necessary to delay the
imposition of such licence condition.
54. Regarding the domestic roaming requirement, Qualcomm and
SUNDAY both urged the TA to consider imposing such a requirement on
the new licensee.
TA’s Consideration
55. The TA intends that the licence conditions applicable to the new
CDMA2000 licensee and the 3G licensees should largely be the same,
except appropriate adjustments will be made pursuant to the prevailing
market conditions and policy considerations (e.g. the ONA obligation).
56. The TA maintains that the network and service coverage obligation
is necessary to ensure that the new licensee will be obliged to roll out the
new network expeditiously, thus replacing the network coverage of the
CDMA Licensee in the shortest possible time frame. The TA does not
subscribe to the opinion of Wharf T&T that the new licensee would have
every incentive to roll out its network given that it has paid for the
spectrum. As a matter of fact, the payment of SUF by the new licensee is
only one of the factors for deciding whether to roll out the network. Other
factors such as the change in market climate and operator’s own financial
status may also play a significant role. The network and service coverage
obligation and the performance bond mechanism will therefore act as a
deterrent to any potential spectrum hoarding to protect the community and
the Government against any default by the new licensee to ensure the
24
continuity of CDMA mobile service in November 2008.
57. When determining the terms for the imposition of the network and
service coverage obligation at strategic locations, the TA will make
reference to the previous Public Radiocommunications Service Licences
for Personal Communications Services in which each of the licensees made
similar coverage commitments to locations like the MTRC and KCRC
railway systems, tunnels, together with corresponding performance bond
requirements. Similar network rollout and coverage obligation will be
imposed on the new licensee and the compliance with the obligation will be
checked against the availability of necessary site and ancillary facilities of
the concerned strategic locations.
58. On the denial of service to suspected stolen handsets, the TA
maintains that it is necessary to combat the use of unlicensed or otherwise
unlawful apparatus. The same licence condition providing the TA with
the reserve power to require the licensees not to provide services to stolen
apparatus have already been imposed on the 2G licensees. The TA
therefore considers it appropriate to impose the same on the new licensee.
However, the TA is aware that this specific network feature is still under
development by equipment vendors. The TA will fully consult the new
licensee, the Police and equipment vendors/suppliers before mandating the
compliance of this licence condition.
59. Concerning the domestic roaming requirement, the TA remains of
the view that it is not necessary to mandate such a requirement. The new
licensee will always have the option to become a Mobile Virtual Network
Operator (“MVNO”) and negotiate for a commercial deal with the
incumbent 2G or 3G licensees for using their network platforms.
60. As a conclusion, with due considerations to the views and
comments of the respondents, the TA decides to impose the following
special licence conditions to the new CDMA2000 licensee:-
� Network and Service Coverage Obligation
� Performance Bond - The exact amount and other pertinent details
of the performance bond will be announced nearer the time of
auction
25
� Denial of Service to Suspected Stolen Handsets
61. The TA will not impose the Domestic Roaming Requirement on
the new licensee.
62. Before the auction, the TA will issue a comprehensive bidding
document including the licence conditions which will be imposed under the
new licence, for information and consideration of the interested bidders.
WAY FORWARD
63. As the way forward, the TA will make an order under section 32I(1)
of the Ordinance designating the 850 MHz band to be subject to SUF and
will recommend to the Secretary for Commerce, Industry and Technology
the enactment of the necessary regulation under section 32I(2) to determine
the SUF by auction. Upon completion of the relevant subsidiary
legislations under the Ordinance by the Legislative Council, the TA will
publish a comprehensive bidding document including auction rules and the
licence conditions which will be imposed under the new licence and
conduct the spectrum auction, tentatively in October 2007.
Office of the Telecommunications Authority
27 April 2007
26
Annex I
List of Respondents to
the Consultation Paper on
“Licensing of Spectrum in the 850 MHz Band
to Enable the Provision of CDMA2000 Service”
� Lo Siu Man
� China Unicom Limited
� Dr John Ure
� Verizon Wireless
� Qualcomm Inc.
� CDMA Development Group
� The Society of External Telecommunications Service Provider
� Sprint Nextel Corporation
� Hong Kong CSL Limited and New World PCS Limited
� KDDI Corporation
� SmarTone Mobile Communications Limited
� China Mobile Peoples Telephone Company Limited
� SK Telecom
� Wharf T&T Limited
� Mandarin Communications Limited & SUNDAY 3G (Hong Kong)
Limited
� Hutchison Telephone Company Limited
� PT. Mobile-8 Telecom
� Telecom New Zealand Limited
� CAT Telecom
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